China’s c. bank cuts interest rates to banks

China’s central bank, People’s Bank of China (PBC), lowered interest rates on medium-term loans to banks as part of a broader stimulus package aimed at bolstering its flagging economy.

The PBC reduced the rate on 300-billion-yuan worth of one-year medium-term lending facility (MLF) loans to 2.00 per cent from 2.30 per cent.

The bid rates for these loans ranged from 1.90 per cent to 2.30 per cent, and the total balance of MLF loans now stands at 6.878 trillion yuan.

The PBOC’s decision to disclose the bid rates for the first time highlights the varying mid- and long-term funding needs among different financial institutions.

This transparency aligns with the central bank’s commitment to improving the clarity of its monetary policy.

The MLF auction result was released separately from open market operations, emphasising its distinct role as a mid- to long-term liquidity tool.

This move distinguishes the MLF rate from the seven-day reverse repo rate, which now serves as the main policy rate.

The PBOC’s action comes as a batch of 591-billion-yuan worth of MLF loans expired this month. This rate cut is part of a broader stimulus package unveiled by Beijing on Tuesday, marking the largest such package since the pandemic.

“The partial rollover did not come as a surprise especially with the planned reserve requirement ratio (RRR) cut,” said Frances Cheung, head of FX and rates strategy at OCBC Bank, referring to the central bank’s planned 50-basis-point cut to the amount of cash that banks must hold as reserves.

The PBC’s disclosure of the highest and lowest bid rates suggests a shift towards a more demand-driven approach for the MLF facility, reducing the reliance on the MLF rate as a primary policy guidance.

In addition to the MLF rate cut, the PBC also injected 196.5 billion yuan into the market through 14-day reverse repos. The interest rate for these operations remained unchanged at 1.85 per cent.

Attribution: Reuters

Subediting: M. S. Salama